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RBI to form panel on MSMEs, have external benchmarking of floating rate loans

Mumbai: With finance for the MSME sector an ongoing key issue between the Centre and the central bank, the RBI on Monday announced it is constituting an expert committee to identify causes and proposed long-term solutions for the economic and financial sustainability of the MSMEs.

Besides, the Reserve Bank of India (RBI) also said there will be a new external benchmarking of floating rate loans by banks to micro, small and medium enterprises (MSMEs) from the next fiscal, in a measure designed to strengthen regulation and supervision of the sector.

While the expert committee will submit its report by the end of June 2019, the constitution of the panel will be finalised by the end of this month, RBI Deputy Governor B.P. Kanungo said at a press conference here to announce the RBI’s fifth monetary policy review of the fiscal.

“They (MSMEs) remain, by their predominantly informal nature, vulnerable to structural and cyclical shocks, at times with persistent effects. It is important to understand the economic forces and transaction costs affecting the performance of the MSMEs,” he said.

“To this end, an expert committee will be constituted by the RBI to identify causes and propose long-term solutions for the economic and financial sustainability of the MSME sector.”

Among the issues that have caused differences between the government and the RBI, and which provked an extraordinary board meeting of the central bank earlier this month, are the government’s desire for liquidity support to head off any credit freeze risk, a relaxation in capital requirements for lenders and support for MSMEs.

On the basis of recommendations made by another expert committee, the RBI announced that external benchmarks would be used by banks for their floating rate loans instead of the present system of internal benchmarks like the Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate and Marginal Cost of Funds-based Lending Rate (MCLR),

“As a step in that direction, it is proposed that all new floating rates for personal or retail loans (housing, auto, etc.) and floating rate loans to micro and small enterprises extended by banks from April 1, 2019 shall be benchmarked to one of the following:

“Reserve Bank policy repo rate, or Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Ltd (FBIL), or Government of India 182 days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL,” an RBI release said .

“The spread over the benchmark rate — to be decided wholly at banks’ discretion at the inception of the loan — should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract,” it added.